The Nifty has established a pattern of higher lows at around 5,750 level, while testing resistance at 5,950-6,000. The time situation remains ambiguous and the market could swing either way. But the fact that the low of 5,690 (Nov 26) has not been violated gives hope that the intermediate downtrend is easing off.
The intermediate downtrend started on November 10 and there was over 10 per cent retracement from the 2010 peak of 6,338. However, while higher lows have been established, the last high of 6,069 on December 6 has not been beaten and the Nifty remains unable to sustain closes above 6,000.
Above and below current spot (5,907), supports and resistances lie at 50-point intervals. The breakdown/breakout levels to watch would be a close outside 5,750 or 6,050 with a swing of 150-200 points in the next two-three sessions post-the breakout/ breakdown. The 200 Day Moving average is at around 5,550 so that is a crucial support. On the upside, resistance at 6,350 is difficult to beat.
Volumes are fair and advance-declines ratios have improved somewhat. Institutional attitude has been net negative and obviously that must change for a serious jump. FIIs tend to stay on the fence or sell out at this time since their financial year closes on December 31. So a pattern of tight range-trading through December cannot be ruled out.
The put call ratios for Nifty options are at normal levels and not indicating anything dramatic. The December PCR is at 1.20. Of the subsidiary indices, the CNXIT has been more or less stable and mildly bullish. The high-beta Bank Nifty has seen dramatic swings, losing more ground than the Nifty. In general, if the Nifty does move up, the BankNifty will be a major contributor. It may be worth taking a long Bank Nifty position with a stop loss at 11,250 and a target of 12,250.
Traders should be prepared for moves between 5,750 and 6,100 with the possibility of a break till 5,550 or 6,250. On the money, the 5,900c (123) and 5,900p (91) show significant differential in pricing. The close to money December bearspreads and bullspreads both offer reasonable risk-reward ratios but the bearspreads are better.
A bullspread of long 6,000c (72) and a short 6,100c (38) costs 34 and pays a maximum of 66. A bearspread of long 5,800p (59) and short 5,700p (39) costs 20 and pays a maximum 80. Obviously the bearspread looks better.
If you want a bullspread go for the long 6,100c (38) and short 6,200c (19), which has a current cost of 19 and a potential maximum return of 81. Delta calculations suggest a handsome return on reversing the trade, if the market does move till 6,000-plus in the next week, even if the L6,100c-S6,200c spread isn’t struck.
We could take care of big moves by taking a long-short strangle combination with a long 6,100c and a long 5,700p versus a short 6,200c (19) and a short 5,600p (25). This costs a net 33 with breakevens at 5,667 and 6,133 and it pays a maximum of 67.
